GTZ Report on Proposal for Nepal Grant Formula - LGCDP

Proposal for a municipal grant allocation formula 12Proposal for a future grant allocation scheme for municipalities in a federal Nepallocal governments. Therefore, the gross fund deoinition for funds to be allocated to local governments – here municipalities – should be a fund that should be oilled by the federal government and should be open for regional governments for funding, too. There are two options• First, all regions could use the total gross fund as an equalisation element: All regions pay in accord-­ing to a formula to be agreed upon, and the funds are distributed across the nation. The funding to a gross fund is an equalisation element, as there might be regions that pay more in the fund than the municipalities are receiving in that region. However, this is depending on the revenue assignment to the regions. • Second, if regions are not willing to use the gross fund as an equalisation element, they could top up the federal grant anticipated for the municipalities within their region. What should be avoided and what should be limited by law is a multitude of different funding schemes, different grant allocation schemes that would encourage imbalances in local government funding rather than to create a fair and equal funding options for all urban areas in Nepal.3.2 Preference for unconditional grants instead of conditional grantsOne key question is designing local government oinance system is the need for federal or regional fund-­ing of local governments in general, and thereafter the question, whether this federal or regional fund-­ing should be unconditional or conditional.In principle, the local government oinance system in a federal state with strong local governments in terms of legal autonomy, oiscal autonomy and relevance for the service delivery, should always seek to ensure sufoicient funding from own sources of revenue. As explained above, own sources of revenue are unlikely to be enough to fund for all functions assigned to local governments, therefore tax sharing agreements are essential in Nepal. However, even with the combination of own source revenues and shared taxes, oiscal imbalances might occur. Fiscal imbalances are typical for those state systems which grant local government oiscal autonomy. The more income of local government is dependent on own source revenues, the more likely are imbalances in terms of per capita income, especially in a country with large differences between municipalities in terms of geographical setting and economic activity such as Nepal.Unconditional grants do have the function to guarantee the function of local government regardless where the local government is located and regardless the socio-­‐economic condition. However, uncondi-­tional grants may contain equalization elements to reduce vertical oiscal imbalances.Conditional grants should be small in number and small in amounts allocated. The main reason is that conditional grants are designed by deoinition to support specioic policy objectives of the Government. The Government has – through the instrument of conditional grants – large opportunities to guide loc-­al council decisions, as conditional grants reduce the cost of service delivery or capital investments. There is no problem in having conditional grants, however, there share of unconditional grants should be much larger to enable local councils to fund local services according to the needs of the local people, while the share of conditional grants should be much smaller to offer incentives for local councils to fund local services according to the political programme of the Government.Dr Alexander Wegener interpublic consultancywww.interpublic-­‐berlin.de